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Technical debt occurs when development teams take shortcuts to expedite delivery and build code that later needs to be refactored, i.e., prioritizing speed over perfect code. It is also a tool to get ahead, and if you choose to have technical debt, it must have strategy, intent, reasoning and a payoff plan. Technical debt can occur across many dimensions like in architecture, test automation, infrastructure, organization, process, design and defects.
In an agile development world, a company always carries a certain amount of technical debt that is considered healthy; only when the threshold is broken does it quickly spirals out. Waterfall teams operate in a zero-tolerance mode for technical debt, a rare and inflexible practice today. Business stakeholders have slightly more tolerance for minor debt and can understand the trade-offs, while technical leaders are tougher on it. However, if you see the situation reversed in your organization, you have bigger problems at play.
Startups feel the pressure to ship and show momentum forcing some early debt to tradeoff against a delayed launch. If these debt items may grow beyond a point, the traction alone will not yield funding at an ideal valuation. Venture capitalists want their money to scale, and the thought of using it to pay back debt is scary.
For early-stage companies, taking on too much technical debt causes product destabilization. I have seen teams working for 12 months on customization and then losing another 12 months to merge and stabilize while delaying their fundraising after failing technical due diligence.
Related: How Should Entrepreneurs Manage Their Debt?
Valuation implications of technical debt
Technical debt is real as interest payments — and the installments of these payments — come out of your valuation, manifesting itself on your P/L in multiple ways. Here are several of these ways:
- Heavy technical debt-laden companies require more headcount to run existing operations and more developer time to build new capabilities.
- Overheads from the delayed realization of synergies from any acquisition made carrying costs for a longer time.
- Possible remediation fines in compliance and security breaches
- Loss of customers and pipeline due to poor customer experience, system outages, degraded performance, timeline delays and inefficient marketing spending.
- Increased working capital requirements for companies with higher inventory balances.
- Spikes in cloud spending costs, small CapEx turning into monumental OpEx.
- Inability to adapt quickly to market changes, causing predatory moves from competitors.
- Multiple versions of the truth create an inability to convert data into information, slowing and lowering the quality of decision-making.
- Lower staff productivity and morale; the opportunity cost of management distractions
- Multiple rejections from venture capitalists create questions on company viability.
As a startup’s go-to-market becomes feature-rich, the technical debt multiplies and the underlying architecture gets exposed for its limitations. Many startups discover that the short-term technical convenience may have killed the company’s long-term success. The technical foundation of any software product is fundamental to future scaling and maintainability. Startups usually work with an 18–24-month runway between funding rounds, and heavier debt built up in its early days could shorten this runway by a quarter or two.
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Managing technical debt
Technical debt is always hard to see and easy to feel. One must be conscious about tackling the root causes rather than the visible symptoms.
1. Admit the problem
Many technical and business executives do not admit this problem and get defensive during technical due diligence; most savvy VCs can see through this and will not throw money to fix the broken.
2. Estimate, prioritize and commit
Remediation must be ongoing and prioritized against growth features, and resources must be committed to resolving it early. It is a tricky situation to manage technical debt while balancing customer needs and new product enhancements. Many startups are guilty of chasing cash flow and traction in the short term but killing their valuations when they come up for funding.
3. Decompose the problems
People criticize agile methodologies for being unstructured and lacking adequate planning. However, agile is the new norm aligning with the business velocity needs of the new era. Managing technical debt in agile requires decomposing the product features into shippable pieces aligned with long-term and valuation-driving goals. All technical debt items must be cataloged in the product backlog. I used to scrutinize the backlog for technical debt items when I conducted diligences for funding or M&A; it is a practice professionals follow to the core.
4. Be disciplined
The easiest way to avoid and combat technical debt. Good executives understand the cost of short-term velocity and the risk of delivering customer-specific builds. Like financial debt, the longer any debt is ignored, the harder it is to stabilize and scale. Pick the right technologies and make hard decisions to retire them as soon as they are not fit for purpose, and don’t undertake nasty workarounds.
Related: Five Easy Ways Startups Can Manage Debts From Day One
Technical debt and its implications are widespread, and the interest on this is repaid by the hour, even if it is not apparent to the executives. Like financial debt, the technical debt must be paid off as it has suffocated many companies’ growth and pushed some to the verge of bankruptcy.
Unlike financial debt, growing technical debt has no formal controls like credit committees, treasury staff or asset liability teams to enforce ongoing tracking. Technical debt must be paid off and costs capital — this will eventually come from the company’s future value (like the value robbed out of shareholders and investors.) The technical debt issue is an area of savvy investors’ diligence with much more rigor lately. Many companies don’t get funded or pay the price with a lower valuation when the diligence uncovers material technical debt.
A level of technical debt is unavoidable and considered the cost of doing business, but it must be handled correctly to ensure a startup’s long-term viability.